Market Expert Advocates for Share Buybacks to Revitalize NEPSE Amidst Supply Glut
The Nepal Stock Exchange (NEPSE) finds itself in a prolonged 'wait and watch' phase, leaving investors increasingly frustrated. Despite a general desire for market growth, existing capital struggles to find avenues for productive investment. This stagnation is exacerbated by a relentless increase in share supply, driven by continuous issuances from the primary market, bonus shares, and rights offerings. While investors are vocal about the need to control this burgeoning supply, a clear strategy from the government and regulatory bodies to balance market demand and supply remains elusive.
In an exclusive interview, Dipendra Pandey, a prominent stock market researcher and analyst, asserts that the most effective solution to mitigate the current oversupply and inject vitality into the market is the implementation of share buybacks. Pandey, who approaches market analysis from an economic and financial perspective, emphasizes data and logic over emotion. He notes that while many investors optimistically anticipate NEPSE surpassing the 3200-point mark, the objective reality points to a market currently moving sideways, primarily due to two critical factors.
Firstly, the market is grappling with an excessive supply of shares. Beyond the already listed companies, a staggering 106 companies are in the Nepal Securities Board's IPO pipeline, poised to further flood the market with new shares. This continuous influx significantly distorts the demand-supply equilibrium. Secondly, valuation concerns are paramount. NEPSE's average Price-to-Earnings (P/E) ratio hovers around 40 to 45. In stark contrast, international markets, such as those in the US or Europe, consider a P/E ratio of 20 to 25 to be on the higher side. This positions NEPSE as one of the most expensive markets globally, suggesting it is currently seeking a more sustainable equilibrium between the 2600 and 3000-point range.
Pandey critically examines the prevailing practice in Nepal where bonus and right shares are often celebrated as significant achievements. He argues that while seemingly beneficial, this tradition merely inflates the number of outstanding shares, further disrupting market balance. He strongly advocates for a shift towards share buyback policies, a common practice in developed economies where major corporations like Google and Apple repurchase their own shares from the market. This mechanism effectively reduces the number of circulating shares, consequently boosting the company's Earnings Per Share (EPS) and enhancing overall share value. Although Nepal's Company Act includes provisions for buybacks, practical implementation has been notably absent, a situation Pandey believes is particularly crucial for large-capitalized entities such as commercial banks and insurance companies.
To foster market balance and manage supply, Pandey suggests a dual approach. Companies must prioritize strong fundamentals over mere share issuance. He urges a pivot from the current 'bonus and right share race' towards cash dividends, which would help manage supply without diluting share value. The concept of share buybacks, as previously highlighted, remains central to his recommendations.
Addressing the role of institutional investors, Pandey explains their current 'wait and watch' stance. While merchant bankers, mutual funds, and broker houses have substantial capital invested, their confidence has been eroded by policy uncertainty and fear. Frequent government crackdowns on large investors and inconsistent policy changes have created an environment where institutional players are hesitant to make aggressive moves. Pandey stresses that without the robust confidence of large investors, the market cannot achieve significant heights solely on the morale of small investors.
The analyst also debunks the notion that the relationship between interest rates and NEPSE has broken down, despite the market's failure to surge even with falling rates. He clarifies that the impact of interest rates has a limit; declining rates previously propelled the market from 1200-1300 points to 3000. Beyond a certain threshold, sustained growth necessitates strong financial performance from companies and the infusion of new capital. Currently, investors remain risk-averse, despite the availability of cheaper credit.
Regarding technical analysis, a tool often dismissed by some Nepali investors, Pandey asserts that it is a misconception. Based on his extensive study and experience, technical analysis provides accurate market direction up to 70% of the time in the Nepali context. However, he emphasizes that its effective application requires 3-4 years of continuous experience and a deep understanding of market psychology. While market fluctuations are natural and may unnerve short-term profit seekers, NEPSE remains a secure avenue for long-term investors.
Finally, offering advice to investors amidst growing market pessimism, Pandey shares an encouraging statistic: investors who strategically chose fundamentally sound 'blue-chip' companies between 2012 and 2026 reaped returns of up to 1300% without significant undue risk. His core advice is to avoid speculative trading, focus on company fundamentals, and invest gradually. He confidently states that there is no strong basis for the market to fall significantly below the 2600-point level. Therefore, patience is key, as the market ultimately rewards those who demonstrate it. This perspective underscores the importance of a long-term, value-oriented approach in navigating the current market landscape.
In a related development, the government, as noted by Babukrishna Maharjan, is reportedly preparing to amend the decades-old provision that mandates the par value of shares for public companies to be exactly NPR 100. This potential policy shift could further influence market dynamics and corporate financial strategies.